The Battle Has Begun

The Pigou Club dismisses my argument by falsely assuming that their are no transaction or transition costs. My short rebuttal is in the comments.

3 responses to “The Battle Has Begun

  1. The problem with “sin taxes,” whether the sin is smoking, or not recycling, or driving to see Mom, is giving government the power to decide what sin is, what the wages of sin are (including a cost-of-living increase tied to the CPI-U), and who will pay. The political process is a poor mechanism to decide that fairly or to allocate the funds effectively.

    A longer and sillier response is available at: ThreeSources

  2. While your arguments are correct, I don’t think there is anything wrong with wanting people to limit their consumption of gasoline or to change their behavior. Just because taxes may be a poor solution I don’t think we want to ignore the problem because one person may not agree.

    For example, tax breaks to purchase fuel-efficient vehicles I believe it a worthwhile solution. Subsidies for firms to find better alternative energy may be another good solution.

    In terms of the minimum wage, again the premise that people should earn a decent wage may not be incorrect. However, instead of using a minimum wage to correct it, we could focus our resources on making individuals more upwardly mobile (like education or job training skills).

  3. Your essay on Pigouvian Taxes has many weak points. I will attempt to explain some of the flaws in your reasoning point by point. Before doing that, however, let me make two general comments. First you seem to ignore the fundamental efficiency of pollutions taxes in that they equalize marginal abatement costs across all uses and that they align the incentives of decision makers weighing trade-offs of the benefits and costs of pollution with society’s. Second many of your objections simply go away if one assumes that human beings are not completely unadaptable idiots. (i.e. long-run elasticities tend to be much greater than short-run elasticities)

    Now point by point…

    YOU SAY:
    “Individuals respond to incentives. So, if a tax is placed on a good, individuals will be inclined to change their behavior. ”

    I RESPOND
    Yes, on this, we agree.

    YOU SAY:
    “Pigouvian taxes work especially well on things like cigarettes and alcohol. The increased taxes cause many to cut down on their unhealthly habits; or even quit. However, there is something quite different between tobacco use and automobile use.”

    I RESPOND
    Really? Other than the obvious fact that one does not inhale or drink gasoline, I don’t see a fundamental difference. Ultimately, the consumption of gasoline is a choice just like anything else. But perhaps you are referring to a difference in elasticities? Last I checked, it takes a pretty steep tax on cigarettes to get significant demand effects, so I’m not even sure you are making the right comparison. Also if by “health” you mean absence of death and injury, driving is at least as “unhealthy” a habit as tobacco or alcohol; it kills many more people.

    YOU SAY:
    “Most people use their cars to drive to work, the store, and to see friends and family. If the tax on gasoline was raised, Mankiw argues, individuals would consume less. However, individuals would still have to go to work, pick up the groceries, and presumably visit with family. Thus there would be little wiggle room for reducing consumption.”

    I RESPOND
    Fundamentally you seem to have little imagination for how things could get done with less gasoline consumption or faith that people could figure out a way. First let us not forgot that all of these everyday tasks you mentioned were performed by individuals BEFORE the invention of the automobile; we know its possible. But I am not suggesting everyone go buy a horse. Let’s take just one of these as an example.

    “go to work”. Off the top of my head: 5 ways to reduce gas consumption: (a) Drive a higher mileage vehicle. (b) Walk or Bike. Walking 2 miles (or biking 5) only takes about a half hour and lets face it, most of us could use the exercise. (c) Live closer to where you work. (d) share a ride (e) public transportation. Probably there are a half dozen others I am not thinking of because I don’t have the incentive to think of them with gas at $2 per gallon.

    Most people focus on (a), but I believe (c) lies at the root of the long-run changes we would see if folk had to pay the full cost of their fuel. Higher fuel prices will encourage people to live closer to their daily destinations (work, grocery store, etc) and probably encourage denser settlements. which in turn will facilitate (b), (d) and (e). Of course, you spelled out several objections to this which may be summarized as “it can’t happen immediately” and you are correct. But I would expect significant changes along these lines within 5-10 years. Also most proposals for a fuel or carbon tax recommend phasing it in slowly over time to allow for individual to plan by way of car purchases and dwelling location decisions.

    Another objection which you have not cited (but I’ll help you out) is that denser settlements are not uniformly beneficial. People like having some distance between themselves and their neighbors. This is a trade-off that I admit. However, without the proper externality taxes on gasoline and driving, it is not a trade-off which the market currently balances optimally. This is the broader undeniable benefit of Pigouvian taxes: they induce the market to optimally balance these trade-offs. As it stands, the marginal benefit of building another house for a commuter 25 miles away from his workplace may appear to outweigh the cost, but often this is only because the cost to society of all those added miles driven and gallons of gasoline burned is not entirely paid for by those making the decision to build it.

    YOU SAY:
    “In addition, substitutes are in short supply. Those who live in cities like New York and Chicago may be able to take some sort of public transportation, but what about those who live in the suburbs? Suburbanites, in general, would be disproportionately hit with the tax. In effect, the tax would penalize individuals based on their proximity to work.”

    I RESPOND
    Yes, it should penalize individuals based on their proximity to work (see above). That is the point. People should pay for the resources they consume, the damages they cause, and the risks they exacerbate. Objecting to a fuel tax on this basis is like saying “we are unjustly penalizing individuals based on how much they choose to eat; food should be free”. Also, in the long run, as the demand for public transportation shifts out, the supply would increase. (basic econ 101 stuff.)

    YOU SAY:
    “Carpooling is a possible option, but for many workers. There are unseen costs associated with carpooling; the passenger is at the mercy of the driver and his schedule. In addition, carpooling is not an option for many in large metropolitan areas where co-workers are relatively spread out.”

    I RESPOND
    Again, one can admit that every possible way to cut down on gasoline consumption comes with unpleasant trade-offs. I have already pointed out that everyone living closer to where they work is not uniformly beneficial. But again, as in that case, only with a tax reflecting the external cost of gasoline consumption and driving can one expect individuals to assess these trade-offs optimally in their own cost-benefit analysis. Car pooling may or may not be very much more popular at $4/gal, but whatever that level of popularity turns out to be, it will be closer to the socially optimal level.

    YOU SAY:
    “Further, many drivers are locked into contracts — whether it be through a lease or some sort of financing. Therefore there would be a high cost for individuals to switch to a more fuel efficient vehicles. In the short run, we would see very little shifting to more fuel efficient vehicles and those who are locked into the contracts would begin paying a high price immediately.”

    I RESPOND
    There are two issues here – one related to efficiency and the other to equity. Let us consider efficiency first. This is really just about sort-run vs long-run elasticity. Median car turnover is something like 12 years. Suppose the tax were immediately imposed at full strength (whatever that may be – perhaps $1 or $2 per gallon equivalent). One would not expect to see the full effect of the tax on vehicle mileage until something like that length of time. Although we should expect the turnover decision to be accelerated somewhat for owners of especially poor mileage vehicles. Put another way, if pundits such as you hadn’t given the Clinton administration such a hard time for trying to do this back in 93, we’d be well past this by now and many fewer people would be driving urban assault vehicles to work today. The second issue is equity. Implement a tax at full strength immediately would no doubt be a net benefit people who were about to change their vehicle and a net cost to people who just bough new Yukon. As little sympathy as I have for that latter group, most advocates of such taxes, including myself, recommend phasing it in slowly (say over 5 years). This ameliorates the bulk of the inequity and insures that people buying a car today do the proper cost benefit analysis.

    YOU SAY:
    “In addition, transportation companies would see the costs of operation skyrocket. This cost would not simply be absorbed. Instead, the cost would be past along to wholesalers and retailers and thus to consumers.”

    I RESPOND:
    It is true that the cost of transportation would increase – though “skyrocket” is probably an exaggeration. In the medium to long run, freight would most likely experience a vast mode shift. I suspect all modes would survive, but we would probably see less freight shipped by air and truck and more shipped by rail and barge. AGAIN, Pigouvian taxes enables individual shippers weighing the trade-off between modes to align their interests with society’s. And yes prices to consumers would increase. But let’s think just a little deeper shall we? First would the price increase be uniform? No. Consumers demanding goods which are most energy/carbon intensive (either in terms of manufacturing or transportation) would be experiencing the sharpest price increases. So do the taxes “penalize” these consumers for choosing aluminum cookware shipped overnight from Italy? Yes they would, but again, that is the point: to get individuals to pay for the resources they consume, the damages they cause and the risks they exacerbate. Second, would these taxes be bad for all consumers? No. Pigouvian taxes raise revenue. There are many things that could be done with that, but the most common suggestions are simple rebates and reduction of other taxes (aka revenue neutral shifting). No matter what the mechanism of return is, we can say, roughly speaking, that anyone consuming an amount of gasoline (and other taxed fuels) above the national average would be worse off (in terms of net tax burden) and anyone consuming less than the national average would be better off (since the rebate or reduction in their other taxes would exceed their Pigouvian tax contributions). But even many of the folks who might be worse off in terms of net tax burden would still be better off overall since many of the benefits of the Pigouvian taxes are not accounted for in the rebate or reduced payroll taxes they would receive. Many of the benefits would be things like cleaner air (fewer respiratory illnesses, higher crop yields, etc), less auto and truck traffic (and associate fatalities), “less dependence on foreign oil”, and less risk of harms associate with climate change.

    YOU SAY:
    “Pigouvian taxes are designed to correct for externalities. A pigouvian tax on gasoline, however, would be riddled with its own negative externalities. The tax assumes that individuals have a greater ability to reduce consumption than is actually the case.”

    I RESPOND:
    I am not sure you understand what an externality is. Is the sentence that follows “… own negative externalities.” suppose to say what some of those may be?

    YOU SAY:
    “In addition, the tax targets only those individuals who are least able to avoid it.”

    I RESPOND:
    That statement applies to ALL taxes. In my Econ 101 class, we call this the inverse elasticity rule of tax incidence. In any case, if you have equity concerns about Pigouvian taxes, then as I have already suggested, the burden depends largely on how the revenue is spent.

    YOU SAY:
    “The tax is a bad idea. Enough is enough.”

    I RESPOND:
    If you accept that governments must raise revenue to provide public goods like national defense, then the question is not binary – good or bad. It is, would you rather tax labor, capital or pollution/externalities? Holding government spending constant, I vote for taxing pollution over taxes on labor and capital any day.

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